Rosenberg was disqualified by ASIC from providing financial services on the basis that he had engaged in misleading and deceptive conduct in relation to financial products by engineering transactions that created a false market or the appearance of a false market in listed securities. Rosenberg was disqualified for four years. By the AAT setting aside the disqualification the ban is to be treated as if it never came into effect.

Rosenberg was the Managing Director of the Tricom Group of Companies now Stonebridge Capital. Tricom’s operations included a securities margin lending business through which it lent a percentage of the value of stock pledged by its customers to secure borrowings.

The money Tricom lent was secured against the client’s share portfolios and legal title in shares securing the borrowings were, as a condition of the borrowing, transferred to Tricom. Tricom’s obligation was to restore to the client borrower their securities on the repayment of the borrowings.  

Tricom’s business operations were funded from borrowings from, amongst other organisations, Opes Prime. Tricom’s borrowings from Opes were secured by Tricom transferring legal title in those securities transferred to it by its clients to Opes. Opes’ obligation was to restore to Tricom the securities on repayment of its borrowings. To further complicate matters Opes funded its operations through money lent to it by ANZ and Merrill Lynch. Opes’ borrowings were secured by the transfer of legal title in the securities to its lenders.

The effect of these borrowing arrangements was that title in Tricom’s customers securities ultimately ended up with the ANZ and Merrill Lynch as security for Opes’ borrowings.

Pursuant to the terms of these lending arrangements, on the discharge of a loan the lender is obliged to restore to the borrower the equivalent stock provided by the borrower to secure the borrowing. Meeting its obligation to restore equivalent stock to the borrower may involve the lender going into the market to purchase the equivalent number of the client’s securities. No issues arise until a lender in the chain is by reason of insolvency incapable of meeting its obligations to restore on-lent stock to its borrower.

In early 2008 Opes fell into financial difficulties and in March 2008 Receivers and Administrators were appointed to it. When Rosenberg heard that Opes had appointed administrators, concerned about the implications for Tricom and its clients, he sought urgent advice from senior Tricom staff, insolvency practitioners and other persons expert in the market as to how Tricom could secure the return of the securities on-lent by it to Opes.

Two options were identified to recover the on-lent stock. Firstly, that Tricom borrow money to finance the transfer of stock from Opes to Tricom or secondly, that Tricom entities enter into special crossings agreements to buy and sell the on-lent stock thereby triggering Opes’ obligation to restore on-lent stock to Tricom.

Unable to secure an immediate commitment from its bankers, Rosenberg caused a series of special crossings to be entered into between the two Tricom entities in respect of the on-lent securities. The price nominated in the special crossings were considerably below the prevailing market value. The pricing of the special crossing trades reflected the amount that had been borrowed against the stock and was required to discharge Tricom’s obligations to Opes.

A special crossing is conducted off-market and may be at any agreed price regardless of the market price. The time, price and volume of stock traded by special crossing are notified to the market via the ASX’s integrated trading system and bear a code that tells the market that the stock has traded by a special crossing. There is no requirement to explain why a stock has been traded by special crossing or the why the trade may be below the prevailing market price.

Prior to executing the special crossings, Rosenberg spoke with two ASX compliance officers and explained what Tricom intended to do. Neither ASX officer expressed a view about the legality of the proposed transactions.

Prior to the obligation to deliver stock under the special crossings crystallised, each of the special crossings were cancelled. Tricom had in the meantime secured bridging finance to finance the securities back from Opes to Tricom.

There you would expect that things would have ended, until ASIC formed the view that the proposed special crossing transactions were a contrivance that was misleading and deceptive and created the false appearance of a market in each of the securities because Tricom was on both sides of the transactions. ASIC disqualified Rosenberg on this basis.

Immediately on being notified of the ban, Rosenberg made application to the AAT seeking orders staying the ban, preventing ASIC publicising the ban and suppressing his identity in the AAT review process. The AAT agreed with Rosenberg reasoning that the effectiveness of the hearing and the application for review would be materially impaired if the ban was not stayed and Rosenberg’s identity suppressed pending the review. Persuasive for the Tribunal in granting the stay was the effect, irrespective of whether the decision under review was ultimately set aside, the ban would have on Tricom’s two hundred plus employees and Rosenberg’s professional reputation.

ASIC appealed to the Full Court of the Federal Court (Justices Moore, Downes and Jagot). Justice Downes, in addition to being a Federal Court judge, is the President of the AAT. The appeal was dismissed on the basis that the AAT stay and suppression order was made within the AAT’s power. However, in a joint judgment Justices Downes and Jagot profoundly disagreed with the Tribunal’s approach in preferring Rosenberg’s private interest over the public interest in full disclosure. Their Honours reasoned that the purpose underlying the statutory disqualification scheme was protection of the public and therefore that it is the public interest which informs the competing interests between those effected by a banning order. Their Honours held that “information is the key to effective trading in any market. It takes the place of regulation in ensuring fairness. A market that is not fully informed is not operating properly ….. the critical matter is that the market is fully informed. If the banning order is not disclosed, but subsequently upheld, is not the investor entitled to complain that all the circumstances should have been made public?”

The public interest was in a fully informed market which required full disclosure irrespective of the private reputational and financial cost to the banned individual, their employer and employees. Stays of administrative decisions made for public protective purposes and identity suppression orders will be hard to come by in the AAT from now on.

On the substantive review of ASIC’s decision the AAT formed the view that Rosenberg did not contravene the Corporations Act and that the preferable decision was that the banning order be set aside.

A person can only be disqualified from providing a financial service by ASIC, in the exercise of its administrative power, if ASIC finds that the person has contravened a financial services law or is likely to do so in the future. The gateway finding underpinning ASIC’s decision to ban Rosenberg was that the special crossings, notwithstanding their being notified to the market, were an act of market manipulation and misleading and deceptive.

ASIC’s conclusion that a false and misleading appearance in a market was created by the special crossings, even given the somewhat unique factual circumstances of the trades in question, is novel and it is unremarkable that the Tribunal rejected the proposition. Similarly given that the information disclosed to the market about the special crossings was objectively accurate it is equally unremarkable that the Tribunal rejected the contention that Rosenberg had engaged in misleading and deceptive conduct.

A finding of contravention triggers a discretion, not an obligation, in ASIC to disqualify. The discretion should only be exercised if ASIC is of the view it is in the public interest for it to do so. What emerges from the facts is that Rosenberg was a highly capable market participant, acting with appropriate levels of advice in exceptional and trying circumstances that were unlikely to be repeated. His motivations and objectives were to secure outcomes that were for the benefit of Tricom clients. The AAT concluded that, irrespective of its findings on the contravention, no protective or deterrent purpose was served by disqualifying Rosenberg from providing financial services in these circumstances.

Disqualification of persons from undertaking vocational work on the basis that the person is not a fit and proper person or is a threat to the community has profound consequences (and are intended to do so) for the banned individual’s livelihood, life prospects and their dependants. The negative reputational effect on the banned individual’s business can also be significant with flow on consequences for the livelihoods of others.

Commonly disqualification orders are based on a finding that the banned person has breached a law in the performance of their work and can be made either by the corporate regulator (commonly ASIC or Australian Prudential Regulation Authority) exercising administrative power or by a superior Court exercising judicial power on the regulator’s application.

When the exercise of an administrative discretion to disqualify seriously miscarries, it raises questions about the appropriateness of the corporate regulator retaining, as a part of its administrative functions, the power to make banning orders. In this regard APRA has recently had its administrative power to disqualify senior managers of insurance companies and superannuation funds on the fit and proper ground revoked by legislative amendments. The removal of APRA’s administrative banning power was prompted by industry concerns about the exercise of its disqualification powers.

The arguments in favour of disqualification through the exercise of administrative power are cost and speed of delivery of outcome. Neither argument withstands much scrutiny. Administrative decision making, affording natural justice as it must, is no less time consuming or labour intensive than equivalent judicial processes. Very often a contested administrative decision will be more costly and time consuming both for the regulator and the citizen than the judicial alternative. A contested administrative decision starts with the regulator disclosing its preliminary findings to the citizen and requiring that the citizen show cause why he or she not be disqualified, then the citizen responding to the show cause notice, followed by a hearing before a delegate of the regulator (where evidence may be taken and legal argument takes place) and then an internal appeals process. If the citizen seeks a review in the AAT, there is a complete re-hearing before the AAT with rights of appeal to the Federal Court.

Often this multi layered process results in the expenditure of a disproportionate percentage of a corporate regulator’s legal budget and the incurring of costs that are prohibitive for any citizen, other than the extremely wealthy or those funded by an insurer or a supportive employer. The legal cost disincentive is exacerbated by the AAT, in most cases, having no power to make costs orders in favour of a successful litigant.

Most of the procedural steps listed above are avoided when disqualification orders are sought from a Court.

It is writer’s view that the public interest in being protected from the dishonest and the incompetent and in the transparent and efficient exercise of executive power is best served by disqualification powers being reserved for the exercise of judicial power by superior Courts in either their civil or criminal jurisdictions. Moreover, that the perception of the provision of natural justice is better achieved by the trial process and the deterrence purpose better served by hearings being conducted in open Court and by the provision of judicial reasons.

It is suggested that procedural and substantive justice, and the relevant public and private interests, would have been far better served in the Rosenberg matter if ASIC had sought disqualification orders in a Court based on a claim that financial services laws had been contravened rather than by exercising its administrative discretion.